1) Revenues are earned when the seller substantially completes performance required
by an agreement.
2) Stock valuation involves estimating the worth of a company, one of its operating
units, or its ownership shares.
3) The indirect method for cash flow from operating activities begins with accrual-basis
operating income.
4) Issuing common stock in exchange for a building will create a cash inflow in the
financing activities section of the cash flow statement.
5) Affirmative covenants stipulate actions the borrower must take.
6) Research indicates that while managers often have no qualms about earnings
management, few managers would engage in real transaction management (e.g.,
delaying research and development or advertising) in order to meet earnings targets.
7) Because GAAP specifies what must be contained in financial reports, management is
precluded from disclosing financial and nonfinancial operating details that GAAP does
not requirethus promoting comparability among companies’ financial reports.
8) A transitory earnings component is unrelated to future free cash flows or future
earnings and, therefore, is not pertinent to assessing current share price.
9) The FIFO method of inventory valuation assumes that the first unit purchased is the
first unit sold.
10) The wide use of accounting-based incentives is controversial because earnings
growth does not automatically translate into increased shareholder value.
11) Financial statements follow rigid guidelines that require adherence to specific
procedures.
12) The statement of cash flows provides relevant information to lenders, bankers, and
investors to help them analyze a company’s cash flows from its operating, investing,
and financing activities.
13) The IASB’s Exposure Draft for Defined Benefit plans would require companies to
recognize past service costs as part of service cost in the year of plan amendments.
14) Because the MD&A section found in published financial statements is
management’s ‘spin” on the company’s operating results, analysts do not find this
disclosure to be particularly useful given management’s propensity to only accentuate
positive results.
15) Under a perpetual inventory system, purchases are debited to a purchases account.
16) As transitory components become a more important part of a firm’s reported
earnings, the reported earnings are more quality-enhanced.
17) IRS regulations govern the computation of net income for the SEC.
18) Stock options come in various forms, the choice of which is largely dependent on
the tax treatment for the executive and the company.
19) Stringent rules exist for determining when revenue has been earned and is realizable
thus leaving little flexibility for management to “manage earnings” within the confines
of generally accepted accounting principles.
20) Four years ago Alpha Products, Inc. acquired a computer-controlled milling
machine to use in its medical device manufacturing operations at a cost of $5,000,000.
The firm expected the machine to have an eight-year useful life and zero salvage value.
The company has been using straight-line depreciation for the asset. Due to the rapid
rate of technological change in the industry, at the end of Year 5, Alpha estimates that
the machine is capable of generating (undiscounted) future cash flows of $1,500,000.
Based on the quoted market prices of similar assets, Alpha estimates the machine to
have a fair value of $1,200,000.
Required:
a. What is the book value of the machine at the end of Year 5?
b. Should Alpha recognize an impairment of this asset? Why or why not? If yes, what is
the amount of the impairment loss that should be recognized?
c. At the end of Year 5, at what amount should the machine appear in Alpha’s balance
sheet?
d. What would your answer to requirement (b.) have been if Alpha’s estimate of the
machine’s (undiscounted) future cash flows was $2,000,000?
21) A timing difference created this year causes book income to be greater than taxable
income; in future years book income will be less than taxable income. The timing
difference in the future years’ incomes is referred to as
A.reversing timing difference
B.originating timing difference
C.permanent difference
D.minor difference
22) An analyst notes that ABC Inc.’s allowance for uncollectible accounts as a
percentage of year-end accounts receivable has changed. Which of the following would
be a plausible explanation for the change?
A.ABC’s management expects a default rate on outstanding receivables different than
that which has occurred in prior years
B.ABC’s management is using bad debt accruals to “manage” earnings
C.The company ages its receivables and the distribution of accounts receivable over the
various age categories is different than in prior years
D.All of the above are plausible reasons for the noted change
23) At the beginning of 2011, Moony, Inc. has a cumulative unrecognized loss of
$50,000 in its pension plan. The estimated remaining service period of active
employees is 12 years for both years.
The amortization of accumulated unrecognized losses for 2011 is
A.$0
B.$1,375
C.$3,350
D.$4,500
24) IFRS are
A.built on broad principles
B.rules-based
C.narrowly defined, detailed standards
D.seldom different than those issued by the FASB
25) The Skone Corporation reported at the end of the year a LIFO reserve of $25,000.
The beginning LIFO reserve was $20,000. The cost of goods sold was $197,500 under
LIFO. The cost of goods sold under FIFO should be
A.$192,500
B.$197,500
C.$202,500
D.$222,500
26) Under IFRS, which of the following is an indicator of a situation (individually or in
combination) that could lead to a lease being classified as a finance lease?
A.If the lessor can cancel the lease, the lessee’s losses associated with the cancellation
are borne by the lessor
B.The lessee has the ability to continue the lease for a secondary period at a rent that is
substantially lower than market rent
C.Gains or losses from the fluctuation in the fair value of the residual accrue to the
lessor
D.All of the choices are indicators
27) The LIFO reserve disclosure is required because LIFO inventory costs are
A.higher than FIFO inventory costs
B.lower than FIFO inventory costs
C.equal to FIFO inventory costs
D.usually of no consequence
28) On January 1, 2012, the Shaw Corporation purchased 70% of the Ward Company’s
voting stock for $1,050,000. Ward’s net assets had a book value of $1,200,000; the fair
value of Ward’s equipment was $200,000 greater than its book value. The book value of
Shaw’s assets immediately after the acquisition of Ward totaled $3,750,000 while
Ward’s assets had a book value of $2,150,000. Assuming that Shaw used the acquisition
method to prepare its consolidated balance sheet, what was total consolidated assets as
of January 1, 2012?
A.$5,150,000
B.$6,200,000
C.$5,050,000
D.$4,850,000
29) For a firm using the indirect method, which of the following statements does not
correctly describe an adjustment to net income when determining cash flows from
operating activities?
A.An increase in wages payable will be added to net income
B.A decrease in accrued interest payable will be deducted from net income
C.Amortization of bond discount will be added to net income
D.Patent amortization expense will be deducted from net income
30) Under current GAAP, the sponsor of a special purpose entity (SPE) will have to
treat a securitization as a collateralized borrowing instead of a sale if it has
A.the power to direct the activities of the SPE that most significantly impact the SPE’s
economic performance
B.the obligation to absorb significant losses or the right to receive significant benefits
that potentially could be generated by the SPE
C.both a. and b. above
D.neither a. or b. above because securitizations are always treated as sales
31) Conventional wisdom is that
A.investors value a company’s stock based on sustainable operating earnings
B.investors focus on one-time special charges and write-offs
C.”big bath” items adversely affect stock price
D.restructuring an organization causes bankruptcy
32) Which of the following is not a reason why a company would purchase its own
stock?
A.The company needs shares in order to meet employee stock option plans
B.The company’s management may have concluded that the company’s stock is
undervalued at the prevailing market price
C.The company wants to increase its earnings per share
D.The company wants to manipulate its net income
33) All financial statements:
A.provide a picture of the company at a moment in time
B.describe changes that took place over a period of time
C.help to evaluate what happened in the past
D.contain most up to date information about the company
34) On December 1, 2011, A U.S. company sold merchandise to a foreign company for
750,000 francs. The payment in francs is due on January 31, 2012. The spot rate was as
follows: $.20 per franc on December 1, 2011; $.19 per franc on December 31, 2011;
and $.21 per franc on January 31, 2012 when the payment was received. Which of the
following incorrectly describes the accounting for this foreign currency transaction?
A.The receivable was recorded at $150,000 on December 1, 2011
B.The receivable was recorded at $142,500 on the December 31, 2011 balance sheet
C.The foreign currency transaction gain included on the income statement for the year
ending December 31, 2011 was $7,500
D.The foreign currency transaction gain included on the income statement for the year
ending December 31, 2012 was $15,000
35) The Xano Company reported merchandise inventory at LIFO of $450,000 on the
year-end financial statements. The company also reported a LIFO reserve of $34,000.
An estimate of the inventory balance if the inventory had been reported using the FIFO
assumption is
A.$382,000
B.$416,000
C.$461,000
D.$484,000
36) The balance sheet provides information on all of the following except for
A.how management invested its money
B.where the money came from
C.assessing rates of return
D.the market price of the company’s stock
37) Changes in the balance sheet accounts at June 30, 2011 and 2012 for the Poker
Company are presented below:
Additional Information for 2012:
Net income was $480,000 and dividends of $400,000 were declared.
Common stock was issued for cash.
A Long-term investment was sold for $160,000.
A new Long-term investment was acquired for $360,000.
Equipment that cost $600,000 was sold for $200,000. The book value of those assets
was $150,000.
The depreciation for 2012 is
A.$300,000
B.$390,000
C.$400,000
D.$450,000
38) A company contributes to its defined contribution plan. Which one of the following
journal entries properly records this transaction?
A.Option a
B.Option b
C.Option c
D.Option d
39) The market analysis known as fundamental analysis
A.predicts future trends in the financial drivers of a company’s success or failure
B.relies on price and volume movement of stock
C.has no insights about company value beyond current market price
D.uses microeconomic data to forecast stock values
40) Minority active equity investments are accounted for by the
A.fair value method
B.purchase method
C.equity method
D.cost
41) Ford Appliance Center records revenue on the installment sales method. The
following information is available for the first two years of business.
Which one of the following entries properly records the cost of installment goods sold
for Year 2?
A.Option a
B.Option b
C.Option c
D.Option d
42) For a firm using LIFO, the numerator of the inventory turnover ratio is
predominantly current period costs
A.and the denominator consists of old LIFO costs
B.thus it must be adjusted to conform to the old LIFO costs in the denominator
C.thus the denominator must be adjusted by adding the LIFO reserve to ending
inventory
D.thus the denominator must be adjusted by subtracting the LIFO reserve from both
beginning and ending inventory
43) Net property, plant and equipment are reported on the balance sheet at
A.current market value
B.historical cost
C.historical cost minus accumulated depreciation
D.net realizable value
44) The following information has been obtained from the Myers Corporation:
300,000 shares of common stock were outstanding on January 1, 2011 .
50,000 stock options were outstanding on January 1, 2011; each option allows the
holder to acquire one share of common stock for $20 per share. The average market
price of the common stock during 2011 was $25 per share.
48,000 shares of common stock were issued on February 1, 2011 .
18,000 shares of common stock were purchased on August 1, 2011 .
What is the weighted average number of shares to be used in the calculation of diluted
earnings per share for 2011?
A.380,000
B.326,500
C.346,500
D.386,500
45) The basic earnings per share for 2011 is
A.$1.43 per share
B.$1.50 per share
C.$1.54 per share
D.$1.73 per share
46) Financial information capable of making a difference in a decision is
A.relevant
B.verifiable
C.consistent
D.neutral
47) On December 31, 2011, Benton Company sold equipment to Cleveland, Inc.,
accepting a $400,000 non-interest bearing note receivable in full payment. The note is
due on December 31, 2014 . Cleveland, Inc. normally pays 10% for its borrowed funds.
The equipment is carried in Benton’s perpetual inventory records at 50% of its cash
selling price. The present value of $1 to be received n periods in the future = 1 (1 + r)n
where r is the rate of interest per period.
Required:
a. Prepare Benton’s journal entries to record the sale on December 31, 2011 .
b. Prepare Benton’s journal entry on December 31, 2012 necessitated by this
transaction.
c. At what amount would this note appear on Benton’s December 31, 2012 balance
sheet?
48) All the following statements about residual value guarantees are correct except
residual value guarantees
A.protect lessors against lessees who abuse leased assets
B.protect lessees against lessors who abuse leased assets
C.protects lessors against technological changes
D.protects lessors against marketplace changes
49) If one company owns exactly 50% of the voting shares of another company
A.the cost method is used
B.the equity method is used and line-by-line consolidation is required
C.the equity method is used and line-by-line consolidation is not required
D.the company that has more net assets is deemed the parent
50) Staley Enterprises purchased a machine for $260,000. The seller paid $900 freight
to deliver the machine. Staley used $4,600 of staff mechanics’ time to install the
machine and employee training cost $7,000. The state charged a 5% sales tax on the
invoice price. What is the capitalized cost of the machine?
A.$260,000
B.$264,600
C.$271,600
D.$284,600
51) The use of the lower of cost or market method to value inventory for reporting
purposes employs the accounting principle of
A.cost-benefit
B.matching
C.historical cost
D.conservatism
Konan, Inc. uses the lower of cost or market method to determine inventory value. The
following information pertains to the ending inventory:
52) When a company changes from any inventory method to LIFO, the change is
reported
A.prospectively because it is usually impractical to determine the effects of this change
on prior years’ income
B.as an error correction
C.as a change in an accounting estimate
D.using the retrospective approach
53) Earnings per share (EPS) data are prominent in corporate annual reports, but EPS
suffers as a financial performance measure because EPS ignores the amount of
A.revenue required to generate reported earnings
B.capital required to generate reported earnings
C.liabilities required to generate reported earnings
D.expenses required to generate reported earnings
54) A building costing $550,000 with accumulated depreciation of $225,000 was sold
for $275,000 cash. Which of the following statements is correct with respect to
preparing the cash flow statement if the indirect method is being used?
A.$50,000 will be added to net income to determine cash flow from operating activities
and $325,000 will be reported as a cash outflow in the investing activities section
B.$50,000 will be deducted from net income to determine cash flow from operating
activities and $275,000 will be reported as a cash inflow in the investing activities
section
C.$50,000 will be added to net income to determine cash flow from operating activities
and $275,000 will be reported as a cash inflow in the investing activities section
D.$275,000 will be added to net income to determine cash flow from operating
activities and $325,000 will be reported as a cash outflow in the investing activities
section
55) Black & Decker decides to discontinue producing toasters in lieu of more versatile
toaster ovens. In the process of discontinuing this line, the company disposes of the old
equipment and buys new. The disposal of the old equipment would be reported in the
income statement as
A.gain or loss on the sale of equipment as part of continuing operations
B.gain or loss on the sale of production equipment as part of extraordinary gains and
losses
C.gain or loss on the disposal of discontinued business component
D.income from operation of a discontinued business component
56) The Boulder Rock Company has provided the following information pertaining to
its defined benefit plan:
The projected benefit obligation was $2,100,000 on January 1, 2012 .
Recognition of prior service cost during 2012 was $150,000.
Service cost for 2012 was $300,000.
Plan assets on January 1, 2012 totaled $1,500,000.
The expected return on plan assets was 10%.
The actual return on plan assets was 8%.
The settlement/discount rate was 8%.
The December 31, 2012 contribution to the plan asset fund was $450,000.
Benefits paid to retirees during 2012 totaled $225,000.
Required:
1> Determine Boulder’s pension expense for 2012 .
2> Determine the projected benefit obligation (PBO) as of December 31, 2012 .
3> Prepare the journal entry to record pension expense and the funding for the year
ended December 31, 2012 .
4> Determine the balance of the pension plan assets.
5> What should be reported on the December 31, 2012 balance sheet with respect to the
funded status of the defined benefit pension plan?
57) The Dunlop Corporation reported basic EPS of $3.50 for the year ended December
31, 2011; the denominator used in the basic EPS calculation was 360,000 shares.
Dunlop’s marginal income tax rate is 40%. Dunlap had the following convertible
securities outstanding during the entire year:
8% convertible preferred stock with a total par value of $1,000,000; the preferred stock
is convertible into 22,000 shares of common stock.
10% convertible bonds with a total par value of $6,000,000; the convertible bonds are
convertible into 120,000 shares of common stock.
What is the diluted EPS? (Hint: First test each security separately for dilution.)
58) The following data were taken from the financial records of Happy Corporation for
2011:
Required:
How many times was bond interest earned in 2011?
59) The
60) Jensen Homes purchased $160,000 of scaffolding from Lewisburg Builders Supply
on January 2, 2011 . Jensen paid $30,000 in cash and signed a three-year 10% note for
the remaining $130,000 of the purchase price. The note specifies that payments of
$26,000 plus interest be made each year on the anniversary date of the loan. Jensen
made the required January 2, 2012 payment, but was unable to make the second
payment on January 2, 2013 because of a downturn in the construction industry related
to the subprime mortgage crisis. At this time Jensen owed Lewisburg Builders Supply
$104,000 plus $10,400 interest that had been accrued by both companies on December
31, 2012 . Rather than write off the note, Lewisburg Builders Supply agreed to
restructure the loan as follows: one payment of $95,000 on January 2, 2014 would
satisfy the restructured note. The present value of $1 to be received n periods in the
future = 1 (1 + r)n where r is the rate of interest per period.
Required:
Prepare the journal entries made by each company on January 2, 2013 to record the
restructuring of the note.
61) On January 1, 2012, Avalanche Company entered into an agreement to lease
equipment for a ten-year period. The lease requires Avalanche to pay $220,000 on
January first of each year, with the first payment required at the lease inception.
Included within the $220,000 annual payment are executory costs totaling $15,000.
Avalanche has the option to purchase the equipment at the end of the lease term for
$55,000; the fair value of the equipment at the end of the lease term is estimated to be
$120,000. The equipment’s useful life is estimated to be 12 years and the salvage value
after 12 years is estimated to be $10,000. Avalanche’s incremental borrowing rate is 8%
and the implicit rate known by Avalanche is 7%.
Required:
1> Determine the lease liability immediately after the January 1, 2013 payment was
made.
2> Determine the book value of the leased asset as of December 31, 2013 .
3> Determine the total expenses to be reported on the income statement for the year
ended December 31, 2012 .
62) Briefly discuss how a firm’s P/E ratio is related to the firm’s choice of accounting
methods.
63) Why do the stock returns of firms reporting “good news” drift upwards before the
earnings announcement date?
64) Briefly discuss how a firm’s P/E ratio is related to the present value of growth
opportunities available to the firm.